Preparing for Exit - Coombes Corporate Finance

Preparing for Exit


Preparing for Exit

 Part of an ongoing series on issues arising with Owner Managed Businesses through their complete business cycle

 Many Owner Managers find it difficult to exit their business as they are emotionally attached. However it is important to remember that the business is a “vehicle” for you to create income and wealth, and one that needs to be “driven” carefully in order to maximise your return.  This is particularly important when it comes to the time you wish to exit the business, whether it is retirement or just moving onto something else, and that you prepare for the event years in advance.   

The first and foremost preparation point is to ensure that the business is independent of you, i.e. that the business can function without your involvement.  This requires that you have a strong management team employed in the key business areas and that this team works well together.  A strong management team enhances the value of your business to a prospective buyer and conversely without a strong management, the business value is less.  To put this in place can take significant time and effort in identifying the right people, putting succession planning in place, training them in the various management skills and ensuring they work well as a team.

Furthermore, it is important to ensure that all the key relationships with customers and suppliers do not reside solely with the Owner Manager and are passed onto or at least shared with another manager.  Customers in particular are the life blood of the business and most customers like to do business with people, hence relationships are important.  Therefore prepare by involving another manager in the customer relationship well in advance, bring him/her to meetings, golf outings, etc and let he/she become the “owner” of that customer.

An area that can significantly enhance the exit value for the Owner Manager is a well planned and funded pension scheme.  Owner Directors can avail of significant tax efficient methods of getting value from their company that include tax relief on company contributions paid into the Owner Director’s pension with generous maximum contribution rates depending on your age; tax free growth on your money while in the pension fund; and the ability to take up to 25% of the pension fund out tax free when you retire.  These pension funds have many rules and it is advisable to talk to you pension advisor a number of years in advance of an exit to ensure maximum benefit. 

Careful planning of operational items will also enhance the value of your business.  For example, you should put in place written contracts with your customers where possible. A potential buyer likes to see as much security of business continuity as possible and customer contracts gives the buyer this confidence.  One thing to note in preparing such contracts is be aware of any “change of control” clauses that would allow the customer to terminate the contract if your business ever changed ownership.  These should be avoided if possible.

The value enhancement brought by having customer contracts, can also hold true for suppliers and having contracts with key suppliers is important.  However with suppliers, you will need to use your commercial judgement on the terms, ensuring the security of supply of key materials or services without over committing the business and any new owner.

Other items that should be planned in advance of sale to enhance value include:

  • Ensure that employment contracts are in place for all employees
  • All property titles are clean and straight forward
  • Ensure any current or pending litigation issues are resolved or boxed off as much as possible and that any potential liability is quantifiable and minimised.
  • All tax affairs and company compliance issues are up to date
  • Ensure that staff pension schemes are fully paid up
  • Put in place good reporting and management communication disciplines, such as monthly management accounts, weekly/monthly review and planning meetings, etc.

The final step in maximising your value from the company is the sale or exit process itself.  It is important to employ suitably qualified experts during this process to assist in maximising this value, as the process of selling a business is a delicate one and typically you get one chance to get it right.  Having a well run sale process will significantly enhance your exit value and this process will include preparing a Information Memorandum or “Sales” document about your company; identifying potential buyers; ensuring confidentiality and managing sensitive company information; managing the buyers due diligence process; and managing the completion process including negotiating various legal agreements.

In summary, without trying to sound like a school teacher, good preparation will enhance the results and this is particularly the case when it comes to exiting your business, so don’t leave it to cramming the night before the exam!